Hedging Insurance Books

23 Pages Posted: 26 Jul 2015

See all articles by Dilip B. Madan

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Peter Carr

New York University Finance and Risk Engineering

Wim Schoutens

KU Leuven - Department of Mathematics

Michael Melamed

Independent

Date Written: April 18, 2015

Abstract

Complex insurance risks typically have multiple exposures. Options on multiple underliers with a short maturity are employed to hedge this exposure. Hedges are illustrated for GMWBVA accounts invested in the nine sector ETF's of the US economy. The underliers are simulated risk neutrally by writing them as transformed correlated normals. The underlying physical and risk neutral evolution is taken in the variance gamma class as a simple example of a non-Gaussian limit law. Insurance accounts for GMWBVA's are simulated and the present value of aggregate payouts is hedged using least squares, ask price minimization and ask price minimization constrained to long only option positions. The last of these delivers a least cost and most stable result.

Keywords: Acceptable Risks, Probability Distortions, Variance Gamma Model

JEL Classification: G13, G17, G22

Suggested Citation

Madan, Dilip B. and Carr, Peter P. and Schoutens, Wim and Melamed, Michael, Hedging Insurance Books (April 18, 2015). Robert H. Smith School Research Paper No. RHS 2635602; NYU Tandon Research Paper No. 2635602. Available at SSRN: https://ssrn.com/abstract=2635602 or http://dx.doi.org/10.2139/ssrn.2635602

Dilip B. Madan (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

Peter P. Carr

New York University Finance and Risk Engineering ( email )

6 MetroTech Center
Brooklyn, NY 11201
United States
9176217733 (Phone)

HOME PAGE: http://engineering.nyu.edu/people/peter-paul-carr

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Michael Melamed

Independent ( email )

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